Unit-3 RULES TO INCREASE RETURNS POE | BBA First Year

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Definition RULES TO INCREASE RETURNS

• The law of increasing returns is also called the law of diminishing costs. The law of increasing returns states that:
• The increase of the variable factor, keeping the quantities of other factors constant, generally leads to better organization. Production increases at a rate greater than the rate of increase in employment of the variable factor.
• Output continues to grow faster than inputs unless there is a shortage of some essential factor in the production process. As soon as there is a shortage or wrong or defective combination in the productive process, marginal product begins to decline. The law of diminishing returns begins to apply. Therefore, we can say that there are no separate laws applicable to agriculture and industries. This is the only law of variable proportions that applies to one!! Various industries. However, the duration of the stages will vary in each productive venture. They will depend on the availability of resources, their combination in the right proportion, etc.
  

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Application of the Law of Increasing Returns in Industries:

• Therefore, we can say that there are no separate laws applicable to agriculture and industries. This is the only law of variable proportions that applies to one!! Various industries. However, the duration of the stages will vary in each productive venture. They will depend on the availability of resources, their combination in the right proportion, etc.
• “The expansion of an industry which lacks the necessary agents of production is, other things being equal, accompanied by increasing returns”.
• Increasing returns arise primarily from the fact that large-scale production is able to secure certain economies of production, both internally and externally. When an industry expands, it has the advantage of division of labour, specialized machinery, commercial advantages, buying and selling in bulk, savings in overhead expenses, use of by-products, use of extensive publicity and advertising, availability of cheap credit etc. Get. etc.
• The law of increasing returns also applies as long as a factor involves large indivisible units and the plant is producing less than its capacity. In that case, each additional investment will result in an increase in marginal productivity and thus reduce the cost of production of the good produced. Marginal productivity continues to increase until the plant begins producing at its full capacity.

Assumptions:

• The law rests upon the following assumptions:

1. There is scope for improvement in the technology of production.
2. At least one factor of production is considered indivisible.

• Example:

• The law of increasing returns can also be explained with the help of a schedule and curve.

• In the above table it is clear that as the producer expands his business by investing successive units of input, the marginal return increases up to the sixth unit and then falls continuously.
• The answer is very simple. The marginal returns has diminished after the sixth unit because of the non-availability of a factor or factor of production or. The size of the business has become so large that it has become unwieldy to manage it, or the plant is producing to its full capacity and it is not possible further to reap the economies of large scale production, etc.

• In Figure 11.3, units of applied input are measured along the OX axis and marginal returns are represented along the OY axis. PF is a curve showing the law of increasing returns.

Optimizing of Diminishing and Increasing Return

• “Although the role that nature plays in production shows a tendency of diminishing returns, the role played by man shows a tendency of increasing returns”.
• Modern economists differ from this view and are of the opinion that the law of diminishing returns applies to both agriculture and industry. The only difference is that in agriculture the law of diminishing returns starts applying at an earlier stage and in industry at a later stage.
• When the increase in output becomes large, the cost per unit begins to decline as the firm adds successive units of the variable input to some fixed input. 

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